“Loan Settlements for Non-Purchase Money Second Mortgage,” Aaron Green, Combs Law Group

[Note: I can’t find this article on the the Combs Law Group website so I’ll just post the whole article here. If I could find the article on their website, I would just print a blurb here and link to the full article. Hey, they’re lawyers, if they don’t like me reprinting the whole article here, I’m sure they’ll let me know. 🙂 ]

Loan Settlements for Non-Purchase Money Second Mortgage

By Aaron M. Green, Esq.

The focus of this article is settlement of a non-purchase money second mortgage (“NPM Second Mortgage”).

Under Arizona law borrowers of purchase money mortgages (loans used to buy a home, or refinancing of loans used to buy a home without taking any “cash out”) have no personal liability for the debt. However, borrowers who obtained a NPM Second Mortgage, usually a HELOC (“home equity line of credit”), after the purchase of the home can be sued. In such cases the borrower should consider aggressive settlement of the debt. Typically, the earlier a settlement is reached, the more favorable the terms achieved.

The best setting to negotiate a NPM Second Mortgage is at the time of a short sale. Most institutional lenders will usually accept the proceeds of the sale as full payment or require no more than a small cash contribution. For example, we have had clients settle large NPM Second Mortgages ($80,000 to $600,000) in a short sale by contributing zero to $25,000. The amount of the cash contribution largely depends on the available funds in the borrower’s account. It is also very important to review the short sale approval letter to ensure that the lender cannot sue the borrower after the short sale.

If a short sale is unsuccessful, the next best setting to negotiate a NPM Second Mortgage is shortly after a foreclosure. At this time, a borrower can expect to pay 10%-25% of the debt owed. Often times, the settlement amount can be paid over several years with little or no interest.

The worst setting to negotiate is after the lender has retained a lawyer and filed a lawsuit. Although some lenders will still settle the debt for 10%-25% of the debt, others will require an amount closer to 50%. In fact, the attorney for one lender, Wells Fargo, generally insists on full repayment with interest.

In conclusion , it is much more prudent to pro-actively pursue a settlement early rather than ignore the situation and hope that the lender will forget about the borrower. Lenders have up to six years to sue and all major lenders (Chase, Wells Fargo, Bank of America, Citi Mortgage) are pursuing lawsuits on a NPM Second Mortgage.

If you would like assistance regarding commercial or residential transactions, financing, potential litigation, bankruptcy, HOA issues, estate planning or other legal matters, please call our office at 602.957.9810 and arrange for an initial consultation with one of our real estate attorneys.